Why Is the Chained CPI in the President’s Budget?

My last post took on some of the basic questions raised by the debate over using the chained CPI (Consumer Price Index) to adjust Social Security benefits.

I deferred the question in the headline here because the post was already quite long, and the answer isn’t simple. So here goes …

Social Security and the Deficit

Strictly speaking, Social Security doesn’t belong in the budget at all — at least, not in the package of spending and revenue proposals we ordinarily think of as such.

It has its own revenue stream — the payroll tax, plus an earmarked portion of income taxes paid on some of the benefits it provides. It also has $2.7 trillion in reserves, i.e., the unused portion of these taxes, invested in Treasury bonds, and the interest on these.

That’s all it’s got.

A shortfall would be dreadful, but it would have no impact on the deficit — unless, as seems likely, Congress used general tax revenues to avert a sudden, big benefits cut.

This, however, is an argument for crafting a measure that will keep the program solvent, not for putting the chained CPI in the budget.

Some say that the Trust Fund is just an accounting fiction. The Treasury bonds the reserves are invested in signify money that’s being used to help pay for items in what we ordinarily think of as the budget.

When Social Security starts drawing on its reserves, as it already has, the Treasury Department has to sell some bonds to other investors in order to pay the program what it owes — or use revenues from taxes not specifically intended for Social Security.

This doesn’t mean that Social Security is contributing to the deficit, however — any more than you or I could be said to increase the deficit if we cashed in some savings bonds a grandparent once gave us.

More Revenues Without Tax Reform

The chained CPI is probably in the President’s budget in part because it would increase tax revenues without any rate-raising or loophole-closing at all.

According to Congressional Budget Office estimates, the federal government would gain $123.7 billion* over the first 10 years because tax brackets and other annually-adjusted tax provisions, e.g., the personal exemption and standard deduction, would rise more slowly.

So even a quite small increase in income could get taxed at a higher rate. The amount we’d owe wouldn’t be a whole lot greater than what we’d owe if the Internal Revenue Service continued to use the same inflation measure it’s been using.

But the tax code would be somewhat less progressive because filers at fairly low and moderate-income levels would take the biggest hits.

And at least some low and moderate-income families would get smaller reductions and/or refunds from the Earned Income Tax Credit because the maximum credit is adjusted for inflation, as are the phase-outs that gradually lower the credit when earnings reach some level above the amount eligible for the maximum.

There would be no impact on the refundable Child Tax Credit if Congress makes the current threshold for claiming it permanent, as the President has proposed.

Big if here, since we know that Congressional Republicans have wanted the EITC and the Child Tax Credit to revert to their more restrictive pre-Recovery Act forms.

Political Strategy

The revenues raised would be a small portion of the total increase the President now says he’d settle for. So it’s pretty clear the chained CPI is in the budget mainly for strategic reasons.

The received wisdom seems to be that he’s again striving for a grand bargain — offering Republican Congressional leaders the chained CPI and Medicare spending cuts they said they wanted in the fond hope they’ll agree to a scaled-back revenue-raising plan.

Or if not that, perhaps proving they’re altogether unreasonable and ought to lose their House majority next year so that Congress can get important business done.

This is what Michael Tomasky at The Daily Beastthinks the President is up to — and why he thinks no one should fret about the chained CPI.

The Nation‘s John Nichols thinks otherwise. Look, he says, at how the chairman of the National Republican Congressional Committee is already messaging the President’s proposal as a “shocking assault on seniors.”

This is likely to depress votes for Democrats next year, Nichols predicts, citing examples from past mid-term Congressional elections.

The chained CPI proposal certainly has complicated life for Democrats in Congress now, even if they ultimately don’t have to cast an up-or-down vote on it — still TBD.

The larger issue, I think, is that the President has, to some extent, legitimized use of the chained CPI as a way to “save” Social Security — and chosen it instead of lifting the payroll tax cap.

So, as Blake Zeff at Salonasks, “How hard would it be for Republicans to push cuts through, when this [the chained CPI] is now mainstream Democratic policy?”

Cuts, I’d add, that could extend to programs specifically for low-income people, which the President’s proposal would hold harmless.

Note how House Majority Leader John Boehner grudgingly welcomes the chained CPI as an acknowledgment that “our safety net programs are unsustainable.”

This implies something far more sweeping than what the President has proposed for Social Security and Medicare, which arguably aren’t safety net programs anyway.

Well, maybe the rumblings and grumblings, mine included, are just worst-case scenarios. But I’m not ready to bet on that.

* The Office of Management and Budget estimates the revenue gain at $100 billion. Differences between CBO and OMB estimates are not unusual.

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Hi! I'm Kathryn Baer. This blog is one way I use my skills and experience to support policies that will reduce the hardships poor people suffer and the causes of poverty. You can find out more about me here .